Details of Merrill's e-mail quickly filtered into the London and Frankfurt markets and Commerzbank's share price fell 6 per cent to €6.02. Credit default swaps on the bank traded above 200 basis points - a level that prices the German bank out of the market.

Guido Versondert, credit analyst at Barclays Capital, said: "Everyone is so on edge that they're prepared to believe the worst and . . . this is affecting equity and credit markets."

Last week, Klaus-Peter Müller, Commerzbank's chief executive, said he could no longer give a forecast for full-year profit, earlier at €700m-€800m ($688m-$785m), and said he expected 2002 risk provisions of about €1.3bn, up from €1.1bn earlier.

'There are strong parallels to the Thirties after an unsustainable "new era" boom,' says Avinash Persaud managing director for economics and research at State Street Bank. 'Then, the stock market decline was not just steep, it was long, taking three years to reach the bottom.'

'Commerzbank being affected is a sign of the severity. But in today's crisis risks have been offloaded from the banks to the markets and ultimately our pensioners, which makes the problem more difficult to deal with,' he says.

Germany’s Federal Financial Supervisory Agency has also said that it is monitoring the health of the country’s insurers: it fears that many of them will be nursing massive unrealised losses.

Persaud's point about the pensioners is an important one. How can people save for long years of retirement when the stock markets are declining so rapidly? Of course lots of corporate and public pension funds are invested at least partially in the stock market. So their unfunded liabilities rise as the stock markets decline. Plus, declining interest rates make the size of the unfunded liabilities larger as well. People can't expect to live longer while at the same time work fewer years than previous generations. The math doesn't add up. The deflationary forces at work in the markets are going to make the retirement funding issue one that can no longer be put off.